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Divorce and a House With Negative Equity

Divorce and a House With Negative Equity

Divorce and a House With Negative Equity

January 20, 2024

By Johnson/Turner Legal

Divorce and a House With Negative Equity

January 20, 2024

By Johnson/Turner Legal

Addressing Property Division in Divorce: The Challenge of Negative Equity

The Financial Implications of Divorce

Divorce often brings a host of issues, particularly in the financial realm. When a couple separates, each individual must adjust to managing finances independently. An integral part of this process is dividing marital assets and debts. In Minnesota, the law mandates an equitable distribution of these elements. A common concern arises when the marital home, typically a significant asset, turns into a financial liability due to negative equity.

Understanding Negative Equity in Marital Homes

Negative equity occurs when a home’s mortgage exceeds its market value, often described as being “underwater” or “upside down” on a mortgage. This situation poses specific challenges in property division during divorce.

Strategies for Dealing with Negative Equity

  1. Asset Offset Approach: One solution is for the spouse who keeps the home to receive a compensating larger share of other marital assets. This approach aims to balance the burden of the negative equity. However, complications arise if both spouses are named on the mortgage, as banks may hesitate to refinance an underwater home. The departing spouse often prefers not to remain linked to a mortgage for a residence they no longer inhabit.
  2. Zeroing Out the Debt: Another method involves disregarding the negative equity in the division process. This approach benefits the departing spouse and is based on the assumption that the home is a long-term investment that will eventually gain positive equity.
  3. Opting for a Short Sale: Couples may also consider a short sale, selling the property at a loss. This option requires the lender’s approval and can impact both parties’ credit ratings, though it helps avoid foreclosure.

Seeking Expert Guidance in Complex Divorce Cases

Navigating property division in divorce, especially with complicated factors like negative equity, requires expert assistance. Our firm specializes in handling complex property division cases in divorce. Contact us to discuss your situation and explore your options. We’re here to help you make informed decisions about your divorce and property division.

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